The big four banks receive excessive support from the federal government, which is stunting the development of alternative funding sources such as bond markets and securitisation, the Australian Centre for Financial Studies says in a new paper.

“Policymakers should be very careful not to continually make more and more policy concessions to Australia’s largest banks, because that unreciprocated support will damage the development of other capital channels,” Sam Wylie, from the Melbourne Business School, writes in a paper on financing business – the fourth prepared by the ACFS ahead of the release of David Murray’s interim report next Tuesday.

Capital is carried from savers to businesses through four channels: bank loans, the equity market, the bond market and securitisation.

The ACFS said current policies favoured bank lending over capital markets. And the benefits banks derived from government support – such as deposit insurance, the ability to issue covered bonds, and access to the committed liquidity facility with the Reserve Bank of Australia – outweighed the obligations imposed on them, such as having to holding proscribed levels of capital.

In addition, the explicit and implicit guarantees the banks received during the global financial crisis – including the ban on short selling and wholesale funding guarantee – had reduced the cost of capital for Australia’s big banks. “Support for the banking channel since September 2008 has gone beyond what is needed to maintain system stability, without sufficient matching obligations,” the report says.

“Too much support for one channel ultimately will be detrimental to the financing of Australian business.”

Funding advantage ‘worth $2.5b’

The Customer Owned Banking Association, in its submission to Mr Murray, said the implicit guarantee that the government would bail the big banks out in a financial crisis was giving them a funding advantage worth $2.5 billion a year.

Dr Wylie’s report said the government needed to adopt a more holistic approach to examining how bank lending, equity and bond markets, and securitisation markets interact. It argues that if excessive government support for banks is removed, this would allow a deeper corporate bond market to develop without the need for specific debt-market policies.

It also says tax policy is not an effective mechanism for influencing the flows through the four financing channels, suggesting no changes are needed to the equities dividend imputation system.

With Mr Murray’s report also expected to examine how Australian savings can be better directed to financing infrastructure, Dr Wylie said the sector was suffering from a “structural liquidity problem”, which could be alleviated by more infrastructure funds being forced to list in public markets, thereby attracting more self-managed superannuation funds as investors.

The ACFS paper also examined the potential impact on small business lending as the massive central bank stimulus programs were unwound, noting banks were venerable to a large fall in property prices.

“Policymakers should plan carefully for the possibility that bond markets will close at the same time the property market and other asset markets fall substantially during the long period of unwinding of QE,” the report says. They should “plan for how the government can provide the capital and guarantees that would be required in these circumstances to keep capital flowing to businesses that cannot roll over corporate bonds, and small businesses that lose bank funding.”

The ACFS worked with Treasury, the RBA, the ASX and the Australian Bankers’ Association to prepare the independent report. Inquiry panel member Kevin Davis is research director at the ACFS.